Investing in the Green Supercycle

It is remarkable that covid-19 hasn’t delayed or derailed action on climate change, given the pandemic’s devastating human and economic impacts. It is even more remarkable that the sense of urgency about environmental sustainability from governments, businesses and individuals has in fact increased markedly during a time when the pandemic also presented a challenge of unprecedented urgency and scale.

The two crises – climate and covid – are not competing with each other for attention and resources, as you might have expected. Instead, they have merged into a broader conviction that we need to make urgent changes in order to secure a better future.

Actions by policymakers reflect this. President Biden’s pledge to ‘Build Back Better,’ the European Union’s Green Deal and China’s new emissions targets reflect a growing global commitment to achieving ‘net zero’ by mid-century:

Urgency and Ambition

 

The urgency and ambition of this shift have the potential to drive a supercycle for the green economy globally. As this dynamic gathers momentum, investors should be thinking about how to position themselves to capture the opportunities it presents – and provide capital to companies and industries that will be instrumental in a better future.

According to the Entrepreneurs & Family Report 2021 [1], published by BNP Paribas Wealth Management, we are already seeing the early impact of this green awakening in growing allocations to equities with strong Environmental, Social, and Corporate Governance (ESG) credentials. Many of the entrepreneurs we surveyed already have some form of ESG assets in their portfolios, ranging from 80% in Hong Kong, 76% in Indonesia, 73% in both mainland China and Singapore, to 47% in Taiwan.

And while just under a third of investors have already taken action in response to new green investment themes, nearly two thirds are interested in learning more about it as a potential source of diversification – and of returns.

Consumption to Circular Economy

 

As investors scour the investible landscape, one sector that stands out is that food and agriculture-related industries stand to benefit enormously from this historic shift. Large-scale modern farming has a range of negative environmental impacts, including deforestation, which contributes to higher greenhouse gas emissions and loss of biodiversity; unsustainable water use; food waste; and the considerable emissions from food production, processing and transport. Agriculture and food production accounts for 26% of greenhouse gases, 70% of freshwater consumption and 94% of biodiversity loss. [2]

A new generation of companies is working to make food more sustainable. They are producing new and more sustainable kinds of food, such as meat alternatives and vegan options which have a lower carbon footprint. This is driven by innovations like drought-resistant seed-stock, organic pesticides and low-emissions harvest and transport techniques. It follows that companies in the agricultural technology sector will be at the heart of the green supercycle – and could provide compelling opportunities to investors.

Downstream from food production, unsustainable methods of food packaging are also in the spotlight. Investors are conscious of the problems caused by single-use plastic pollution in the oceans, not to mention ever-expanding landfills with their by-products of water pollution and methane emissions.

McKinsey research reveals that consumers are increasingly including packaging considerations in their food purchasing decisions,[3] while the entrepreneurs we polled in Singapore and Taiwan told us they are avoiding food waste and excess packaging in their personal purchasing choices. This suggests they may also have a natural interest in companies whose products could help to address these issues and play a constructive role in climate action.

Green Transport

 

Transportation will be another critical sector for the green supercycle, but its decarbonisation will be a long-term process. Internal combustion-engine (ICE) cars will be on the roads for years to come as the transition to Electric Vehicles (EVs) takes place. During this time, there should be a substantial increase in demand for the metals used in the catalytic converters that moderate emissions from ICE vehicles – platinum, palladium and rhodium.

Meanwhile, as EV adoption increases, so will demand for the base metals used in their production: copper, nickel, lithium and tin. Lightweight batteries will be needed to power them, as well as industrial-sized versions to stabilise electricity grids as they integrate more power generated from wind and solar. Lithium, graphite and cobalt are critical to current battery technologies. BNP Paribas Wealth Management’s Mid-Year 2021Investment Themes noted that these commodities’ prices have been rising since April 2020.

Holding commodities may enable investors to benefit from the green supercycle. Our study suggests there would be a need for a meaningful reallocation of assets for this to happen, though: just 2.8% of entrepreneurs we surveyed included commodities in their portfolios. The good news is that exchange-traded funds (ETFs) today provide a simple and cost-effective way to gain exposure to metals like platinum, palladium, nickel and tin.[4]

Green Performance

 

Different investment styles matter as well as more diversified portfolios. More and more institutional and individual investors apply ESG criteria to asset selection, increasing the incentives for companies to adopt the changes necessary to qualify for better ESG ratings, which are a key signal for capital flows from responsible investors.

Stocks with strong ESG ratings are also generally less volatile. The rating attracts capital for technical reasons, but it also reflects fundamental strengths: a highly-rated company will have conducted thorough analysis of its non-financial risks and disclosed the results, which means they have better governance.

The green supercycle will present opportunities across different sectors and asset classes – and it is changing the way we invest itself. It’s a historic chance for Asian entrepreneurs to put their capital to work in financing a better future, generating a healthy return in all respects.